China Opens Up Banking Sector
March 21, 2007
Kai Yang - Beijing
On November 11, 2006, the State Council promulgated the Regulations on Administration of Foreign Invested Banks (the Regulations), signifying that China has fully opened its banking sector to foreign investors. The Regulations came into effect on December 11, 2006, the fifth anniversary of China’s accession to the World Trade Organization (WTO).
China’s WTO accession agreements require a gradual opening-up of the domestic financial market. In the banking sector, foreign banks were allowed to conduct foreign currency business right after the accession, while RMB-denominated business restrictions were to be lifted on a city-by-city basis. All geographic and client restrictions on foreign banks were scheduled to be removed within five years after accession. Prior to December 11, 2006, foreign banks were allowed to provide RMB wholesale services in 25 major cities, including Beijing, Shanghai, Tianjin, Guangzhou and Shenzhen, but had no access to the RMB retail market. Foreign banks may seek to establish representative offices, branches, joint ventures or wholly-owned subsidiaries in order to provide banking services in China. According to statistics, by the end of September 2006, the total assets of foreign banks reached US $105.1 billion, accounting for 1.9 percent of the banking sector.
Under the Regulations, after December 11, 2006, wholly-owned subsidiaries and joint ventures established by foreign banks, often referred to as foreign-invested legal person banks (FILPB), will enjoy national treatment and be as free as their domestic counterparts to conduct both RMB wholesale and retail businesses. However, an FILPB may not engage in issuance of financial bonds and issuance, and distribution of government bonds. Pursuant to Article 29 of the Regulations, an FILPB may provide a wide array of products and services including savings, commercial lending, bill acceptance and discounting, trading of government bonds, stocks and other securities, letters of credit and guarantee services, international settlement, foreign exchange, bank cards, insurance agency, safe deposit box, interbank lending and consulting services. By contrast, foreign banks’ branches are subject to certain limitations. A branch office may not offer bank card services. With respect to deposit services, it can only take time deposits of not less than 1 million RMB from Chinese citizens. The operation of a foreign bank’s representative office is further restricted. Under the Regulations, a representative office must not engage in any direct banking business in China. Its business is limited to promotion, market research, and consulting.
The Regulations, which have substantially raised the minimum registered capital required for FILPBs and branches, replace the Regulations on Administration of Foreign Invested Financial Institutions (the Old Regulations). The Old Regulations (promulgated December 20, 2001, and effective February 1, 2002) were issued to implement China’s WTO concessions in the banking sector as well. Under the Old Regulations the minimum registered capital for an FILPB was 300 million RMB, and the Regulations increase that amount to 1 billion RMB, equal to the capital requirement for establishing a domestic commercial bank on a national scale. By contrast, the Law on Commercial Banks (amended December 27, 2003, and effective February 1, 2004) mandates lesser capital requirements for municipal commercial banks (100 million RMB) and agricultural commercial banks (50 million RMB). For a branch office, the Regulations raise the capital requirement to 200 million RMB from 100 million RMB under the Old Regulations.
China’s banking regulator, the China Banking Regulatory Commission (CBRC), favors the FILPB from a regulatory perspective and therefore encourages foreign banks to convert their branches to wholly-owned subsidiaries. Under the Regulations, an FILPB is responsible for all of its business activities in China, while a foreign bank would take responsibility for its branch offices or representative office in China. On the other hand, the opportunity to access China’s 14 trillion RMB savings market and to meet growing demands for financial services will provide ample incentive for foreign banks to convert branches to wholly-owned subsidiaries, despite the financial burden created by the increased capital requirement. According to the CBRC, the applications of nine banks to convert to FILPB status, including HSBC, ABN AMRO Bank, Bank of Tokyo-Mitsubishi UFJ and Citibank, have been approved.
Market opening will not guarantee a bigger share for foreign banks, although they are usually backed by stronger capital bases, have good management skills and sound risk-control mechanisms, and can provide better and broader services. Due to the Chinese government’s reform efforts, domestic commercial banks are being re-capitalized and have become more competitive. Moreover, they have well established customer bases and branch networks. For instance, the largest commercial bank in China, the Industrial and Commercial Bank of China (ICBC), has 2.5 million corporate clients and 150 million private clients, and more than 18,000 branches around the country. In comparison with ICBC, by the end of September 2006, all 73 foreign banks in China owned just 191 branches in the aggregate.
In the next issue, we will provide a brief review of the banking reform launched in 1998 by the Chinese government.
For more information, e-mail Kai Yang at kai.yang@hklaw.com or call toll free, 1-888-688-8500.